'I think this Budget will be investor-friendly'

Dr U Sankar, former Director of the Madras School of Economics and now Honorary Professor with the same institution, is one of the most highly respected economists in the country.

In a tete a tete with Shobha Warrier, he talks about his expectations on the Budget and what, in his opinion, should the finance minister do to spur economic growth.

What kind of a Budget are you expecting this time?

I think this Budget will be investor-friendly. The finance minister would definitely want to promote investments because the growth rate is slowing down. Even the manufacturing sector has grown at the rate of less than 3 per cent.

Since he (the finance minister) badly needs investments in infrastructure to boost growth and exports, he will announce some incentives to boost investments in the private sector.

To spur growth in infrastructure, the government is likely to give a lot of incentives to the private sector: domestic and foreign. They will remove the procedural bottlenecks, which has been causing a lot of delay in acquiring land, etc.

Second, they will try to either privatise certain sectors or make sure that the private investors get their money back. This means, the regulatory framework has to be made more independent and transparent.

Compare China and India. While the former gets about $30 billion of foreign direct investment annually, India gets only $3 billion. China is quick in its dealings and labour discipline is also high there. They ensure that foreigners get all the advantages in a time bound manner.

Lot of money is available in the global market because of recession, but the government needs to give an attractive package.

From April 1, the Tenth Plan starts. And, the government wants to achieve 8 per cent growth. The simple calculation is that if you want to have 1 per cent of growth rate or, if you want Re 1 worth of additional output, you must have Rs 4 worth of gross investment.

The estimated gross domestic capital formation is around 34 per cent. The government needs to give incentives to boost our gross domestic savings, which is much smaller now. Even then, it will not go beyond 30 per cent. Only China is able to get 38 per cent savings.

Therefore, the gap between the gross domestic capital formation and gross domestic saving has to come from FDI, or from the current account deficit.

How is the government likely to structure taxes and duties to give a boost to the economy?

Because of the commitment to the World Trade Organisation, customs duty will have to be brought to the south Asian level. So, there cannot be any increase in the customs duty.

In fact, he is expected to lower the customs duty. We have three rates in the excise duty, and there will only be rationalisation and not much increase.

But he may try to widen the tax net by bringing in more service tax. The government had appointed a committee under Govinda Rao to identify areas for service tax.

We already have income tax rate of 30 per cent. For a country like India, it is not feasible to reduce it any further. Some European countries tax more.

So, there won't be any tax cuts. They may abolish the surcharge, that's all. They may remove some of the exemptions.

Do you expect any change in the Budget deficit?

Magnitude of the deficit will be much smaller than what is expected, partly because of the divestments and also due to the slowdown in capital expenditure.

Several reforms announced by the finance minister in the last Budget are yet to be implemented…

Yes, he had announced a number of reforms but has not implemented many of them. That is a general complaint. Some of the reforms require constitutional amendments. So, what you need is consensus, support from the opposition parties.

The Confederation of Indian Industry has voiced its concern over the dip in the growth in industrial production. What can be done to address this?

Industrial production growth, which is about 2.8 per cent to 3 per cent should pick up. It is very low now. The finance minister has to do something about this.

Growth decelerated from 1998-99 onwards. 1998-99 was a poor agricultural year too. It picked up a little during 1999-2000, but then the global recession started.

Moreover, people's expectations about the future are somewhat bleak. Interest rates have fallen, and people are unwilling to invest. That is partly because they are worried about the political instability.

The inflation rate is 2 per cent, but the Reserve Bank of India suggests that it must go up to foster growth. Your comments?

It is a question of what is the optimum inflation rate. Inflation rate of about two per cent is very low for a country like India since the low rate is because of lack of demand. This again is the result of a drastic cut in public investment.

My opinion is that the finance minister has to give a big boost to the housing sector. The housing market, particularly commercial housing has been in a very bad shape in the last one year throughout India.

This sector not only guarantees a great demand for cement and steel, it is labour intensive too. The government also has to encourage rural housing, which will indirectly boost the growth of the industry.

What do you think Mr Sinha will offer to the agriculture sector?

To facilitate growth in the agriculture sector, you need good infrastructure, godown and storage facilities.

There are plenty of opportunities for the export of agricultural and horticultural products as cost of production in India is very low compared to many other countries. The question is, how do you take the fruits and vegetables from the farm to the market and then outside the country? You need public investments in these areas because most of the farmers are small farmers and not big companies. So, they have to come under the umbrella of a society or networking to guarantee that the quality is good.

On Valentine's Day, it was reported that flowers worth Rs 50 million were exported from Bangalore to Belgium. This shows the possibilities that exist in this sector. What you need are power, communication and roads.

Sinha had promised certain things in the last Budgets but he has to do it now. It is also true that many of these things have to be undertaken at the local level, by the state government or the local bodies. But he has to do something to encourage any such move.

Do you expect any dramatic decisions from the finance minister regarding the surplus food grain that we have now?

The recent decision of the government to allow free movement of food grains is most welcome. I feel we shouldn't be too parochial. Each state need not try to produce everything.

But we have a surplus of 60 million tonnes foodgrains lying in various godowns. You just cannot keep them there for too long. This can be utilised in the "food for employment" scheme. It has been successfully implemented in Maharashtra.

Instead of wasting the surplus food grains the government can utilise it to develop rural roads, repairing wells, digging canals and building houses. This way jobs, too, will get created.

When Indian economy was liberalised, consumers were very active in the market. Now, they do not want to spend their money at all. When do you expect the consumers to change their attitude?

Numerous factors affect the sentiments of the people. Now, they are adopting a wait and watch attitude.

See, even savings are low now. Many of the households do not know where to invest or spend their money. They have no faith in the stock market. The mutual funds are not doing well. Bank deposit rates are falling. Although banks are asked to invest their money in the private sector, they are afraid to do so. They are putting the money in government bonds.

The greatest problem is not lack of money. One positive thing that has happened and which is also good for Yashwant Sinha is that we have a food stock of 60 million tonnes. So, even if the harvest fails this time, we will have no problem at all.

Secondly, we have accumulated foreign exchange of $ 50 billion, which is far above what they had originally planned. We need not worry about any import surge at least for some time.

Third, inflation rate is very low.

These are the three positive signs. In fact, I feel the government can even borrow more, and spend it on productive investments, but not on current expenditure.

Sinha has been talking about downsizing the government in every Budget of his but nothing has been happening..

These things must come from the top. It should start from the President's office, the Governor's office, etc. All the cabinet ministers are also expected to downsize their ministries.

Every sector, from the railways to telecom to banks has more people than we need.

There are many states which spend all their money paying salaries and pensions. What is going to happen to these states?

After the implementation of the Pay Commission Report in the year 1998-99, there was a big jump in the salary and pension payment of the central government.

It was also applicable to quasi government institutions and state governments. Some of the state governments could not afford to raise the salaries and were in a terrible financial mess.

Kerala, which has not implemented the Pay Commission Report, is also in a mess. Even well managed states like Gujarat and Maharashtra share the same fate.

It's mainly because politicians are very myopic. They want to spend as much as possible without raising funds or managing the economy more efficiently. Competitive populism, somehow, passes the burden to the next person in charge!

When do you expect the Indian economy to recover?

It depends on so many factors, both external and internal, that speculation about its recovery is very difficult.

Because of its size, the US economy affects the fortunes of almost all the countries in the world. The rumour is that the US economy is picking up. It may take another six months.

Now that the assembly elections are over, Indian economy also can pick up in another six months.

Do you expect a good growth-oriented, optimistic Budget from Sinha?

Last Budget was a good one, but unexpected factors - both external and internal - affected it. He also did not keep many of his promises.

Now, it is an ideal opportunity to revive the confidence of the investors as it coincides with the first year of the Tenth Plan. I also feel that the finance minister has no choice but give an optimistic Budget to boost investors' confidence to revive the economy.

With China growing so fast. We cannot afford to lag behind like this.

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